What You Need to Know Before You Refinance Your Mortgage
If you are already paying off the mortgage on your home, you may wonder why you would need to refinance your mortgage. In a way, you are right. There’s no need to take on a new mortgage if you are happy with your existing terms and payments. It’s still beneficial to know what refinancing is, because it is a tool that can save you thousands of dollars over your original mortgage, if used wisely. Here are some important basics about what refinancing is, when to consider it, and when to stay with the mortgage you already have.
What Refinancing Is
Refinancing a mortgage basically means taking out a new mortgage with new terms and interest rates. The new mortgage pays off the remaining balance of the old mortgage, and then must be paid off under a new payment schedule. Homeowners may refinance mortgages to take advantage of good refinance mortgage rates, or to trade for more beneficial mortgage terms such as to trade a variable interest rate for a fixed rate, or to change the period over which they must pay off the loan.
Advantages of Refinancing a Mortgage
One of the main reasons why homeowners refinance is to lower their monthly mortgage payment. If the difference is big enough, homeowners can potentially save thousands of dollars over the time period of the mortgage. Homeowners also refinance if they need to borrow money against the equity in their home. You can refinance with a loan that is larger than the balance on the existing mortgage and use the extra money to pay for something else, such as education expenses or a new vehicle.
Many savvy homeowners plan to refinance their mortgages to avoid balloon payments or interest rate changes in their original mortgages. Some mortgages offer five to seven years of payments under a low interest rate, then add a balloon payment or switch to an adjustable mortgage rate. If the current refinance mortgage rates are lower than the rate being paid on a current mortgage, this can be enough of a reason to refinance. Homeowners can take advantage of the lower interest rate during the first years of their mortgage, then refinance in order to avoid the balloon payment or interest rate change. Homeowners may also be able to stop paying private mortgage insurance if they refinance after a period of time.
Risks of Refinancing a Mortgage
Just as with taking out an original mortgage, refinancing can be full of pitfalls if you do not completely understand the terms, conditions, and fees associated with your new mortgage. If you want to take advantage of good refinance mortgage rates, make sure that the change in your new monthly payments will be enough to make up for the costs of the refinance. You will have to pay fees or penalties in order to refinance, and these costs may erase all of the potential benefit. Make sure you do the math and verify that any refinancing will save money over the long term and not cost money.
There is a risk for homeowners who take on a mortgage with balloon payments or an adjustable rate provision. It is impossible to predict what interest rates will be current several years in the future. In order to avoid the balloon rate or adjustable interest rate in the original mortgage, homeowners may be forced to accept a larger fixed interest rate than they were anticipating, thus raising their monthly payments.
Refinancing is a tool that can save homeowners a lot of money if they are smart about choosing a new mortgage and avoiding potential risks.